By James Langton
Many who work in the Canadian securities industry and have the pleasure
of dealing with the regulatory system find it needlessly complex and
weak when it comes to enforcing the rules. They now have some
independent validation for that view, as a recent report from the
International Monetary Fund echoes those concerns.
The IMF published three reports in mid-February detailing the results of
its latest assessment of the stability of the Canadian financial
services sector. Along with the overall report on the sector’s
soundness, it also issued more detailed reports regarding the level of
compliance with the International Organization of Securities
Commissions’ principles of securities regulation, and its
recommendations for securities settlement systems.
On the banking side, it found that the Canadian sector is generally
sound and stable and apparently able to accommodate “sizable shocks.” It
did, however, point out a couple of areas in which the banks could face
challenges — namely, breaking into highly competitive foreign markets in
pursuit of growth and the risks inherent in structured products that
have recently been exposed by the credit-market disruption. Indeed, its
high priority recommendations generally involve improving risk
assessment and monitoring fallout from the credit crunch.
However, the IMF also delved into the securities regulatory system,
echoing the chief complaints of many in the Canadian securities industry
regarding regulation. On most counts, it found the Canadian system in
compliance with IOSCO principles, but it also singles out several areas
for improvement — and calls for the adoption of a single regulator.
Indeed, for evidence that the IMF finds the Canadian system unwieldy,
look no further than the fact that, although its review purports to
assess the domestic regulatory system, it bases its judgment only on the
situation in Ontario and Quebec — saying that the task of reviewing
every province would be “impossible” and that focusing on two of the big
jurisdictions represents a reasonable approach.
The report notes that the creation of the umbrella group for provincial
regulators, the Canadian Securities Administrators, marks an improvement
on the existing fragmented system, as does the adoption of the passport
system. But, the report adds, “Even so, moving further to a single
regulator would allow policy development to be streamlined, reduce
compliance costs and improve enforcement.” All of which are familiar
arguments by proponents of a single regulator.
The two areas in which the IMF finds the biggest weaknesses are
enforcement and the regulation of “collective investment schemes,” as
they are known in the international arena (mutual funds and other
The report concludes that there are “gaps in the regulation and
supervision” of investment funds. As it points out, the fact that fund
managers aren’t yet subject to a registration regime means that the
regulators can’t impose minimum standards. “It is questionable whether
they have full disciplinary authority over them,” the report adds. It
also notes that some funds are not required to have a custodian.
These regulatory gaps can hardly come as news to anyone who has worked
in the industry since the mid-1990s, which is when then-commissioner of
the Ontario Securities Commission, Glorianne Stromberg, produced a
report highlighting many of these same issues.
That said, many of its complaints, the IMF report points out, will be
addressed by the CSA’s proposed registration reform. This would, among
other things, require fund manager registration, thereby imposing
conditions such as proficiency requirements, capital and insurance
standards and conflict of interest guidelines. (The custodian
requirements will be imposed by a different rule.)
The IMF indicates that it was told the regulators expect the
registration reform to be adopted by July 1. Whether the CSA meets this
deadline remains to be seen.
When the proposed reform was originally published for comment in
February 2007, regulators said that they intended to have it implemented
by the end of 2007. After it became clear that material revisions were
necessary, they promised to republish the rule by the end of this past
year. However, that has yet to happen.
Now, regulators are planning to publish the rule for another comment
period on Feb. 29 (after Investment Executive’s deadline). This time,
it’s expected to go out for a 90-day comment period, not the 120-day
period it had the first time around. Even so, assuming that the rule is
published as expected, the comment period would finish at the end of May
— giving regulators just one month to finalize it by July 1. That seems
In addition to the gaps that would be addressed by registration reform,
the IMF also notes that the Autorité des marchés financiers currently
doesn’t include mutual funds or fund managers as part of its regular
oversight reviews. It recommends that the AMF add funds to its regular
inspection regime, and that the government in Quebec also consider
bringing mutual fund dealers under securities legislation.
The other big area that needs improvement, according to the IMF report,
is enforcement. Again, this is a familiar complaint to industry veterans
— as are the claims from regulators that they are improving things. The
IMF acknowledges that there has been progress toward better enforcement.
But “it is still in need of considerable improvement,” the report says.
Of course, there’s no silver bullet to instantly improve enforcement.
The implementation date for registration reform seems highly optimistic.
But, at least, when those measures are adopted, they should certainly
close many of the gaps in fund oversight. No similar quick fix is on
hand for enforcement, nor does the IMF propose one.
The IMF does call for regulators to speed up their investigations. And
it specifically points to the need for better integration between
regulatory and criminal enforcement activities. The report characterizes
criminal enforcement efforts as “particularly weak,” noting that “the
development of a co-ordinated approach to enforcement between criminal
and securities law enforcement, with clear lines of accountability and
benchmarks, seems to be missing.”
Additionally, the IMF report suggests there are weaknesses in the
provincial regulators’ oversight of self-regulatory organizations. In
particular, it indicates that the AMF has suffered from staff shortages
that have impeded its ability to oversee the SROs operating in that
province. As a result, it suggests that more co-ordination is needed in
the area of SRO oversight, including the approval process for
regulations. It also says that the regulators’ SRO reviews should be
Along with the recommendations in the areas of enforcement, investment
funds and SROs, the IMF report includes a host of other suggestions
concerning everything from derivatives regulation to government debt
market transparency. It notes that regulators largely agree with its
assessment. The question is whether they have the will or ability to
make the improvements that are needed to bring the Canadian regulatory
system into full compliance with IOSCO principles. IE